Refinancing your mortgage is a big financial decision. Not only do you have to go through the re-application process, but you’ll have to spend a little bit of money to complete the refinance of your home. You may be questioning if refinancing your home is worth the trouble.
In many cases, the benefits of refinancing your mortgage outweigh the hassle. Refinancing your home can lower your interest rate, let you tap into the property’s equity, shorten the term of your loan, and save you money on monthly payments.
If you ask yourself, should I refinance my mortgage, then keep reading to understand how refinancing works and why it might be a good idea for you.
Reasons for Refinancing a Mortgage
When it comes to refinancing your mortgage, it is a good idea to consider the reasons behind your decision first. Most homeowners who decide to refinance are looking to pay off their existing loans to gain the benefits a new loan can provide. These benefits include the following.
Lower interest rates
If your original loan was subject to higher interest rates, refinancing your home can get you a lower interest rate. This means your interest payments will cost less, allowing you to pay down the principal balance.
Mortgage terms vary widely, but the most common are 30-year terms. This means the payments are spread out over 30 years. Depending on your plans and financial situation, you may wish to refinance to shorten this term to 15 years.
Lower monthly payments
Refinancing can also lead to lower monthly payments. You can use a refinance calculator to determine how much a new home loan can change your monthly mortgage payments.
Tap into the equity in your home
Using the equity in your home can be a good option when you need cash to do home repairs or remodels. It serves as a safety net for financial emergencies. You might also use equity from a refinance to consolidate debt from credit cards with higher interest rates into a lower interest loan.
To remove someone from the title
Sometimes you need to refinance your home to remove a person from the title. This happens in the case of divorce or death. These circumstances are not the norm, but refinancing provides a solution to moving forward from these life circumstances.
What is the Refinancing Process?
When you refinance your home, you are taking out another loan to pay off your original mortgage. This undertaking is similar to the initial mortgage application process. You will first have to apply for a loan, which means providing your tax documents, identification, and proof of income. Then, the bank will assess the value of your home.
Before closing the loan an appraisal must be performed. This is similar to when you buy a home. If your house is appraised higher than the refinanced loan amount, you’ll do a cash-out refinance. As long as it is equal to or above the loan amount, you’ll be good to sign the documents and close the loan.
Be prepared for the costs of refinancing. It can end up costing between 3% to 6% of the principal of the loan. However, the long-term benefits will far outweigh this cost if you ask yourself the right questions before refinancing.
Reasons Not to Refinance Your Home
There are many benefits to refinancing your home; however, there are some instances when you should hold off on taking the next step in the process. Keep these reasons in mind as you ask yourself the critical questions about refinancing.
You have a long “break-even” period
There is a period called a “break-even” after refinancing a mortgage. Simply put, this period can take time, about five years, where it seems like you’re not saving any money. However, if you wait, you will eventually begin to save. Refinancing before you give your original loan time to break even can cost you time and money that you didn’t need to spend.
You can’t afford to close on the loan
If you can’t afford the closing costs on the loan, don’t refinance your house. Closing costs can be rolled into the loan, but they add principal and interest. If you can’t pay the closing fees out of pocket, you might not save money in the long run.
You’re not actually saving money
Because of the time and processing fees involved in refinancing, knowing how much you stand to save with refinancing is essential. This number varies depending on the terms and conditions of your original mortgage. You’ll want to run all the numbers, including processing and closing fees, as well as possible interest rates, to determine if refinancing will be saving you money in the long run.
Questions to Ask Yourself Before Refinancing
Your objectives are what matter most in the decision to refinance your home. Before you talk to a mortgage lender about refinancing, ask yourself these important questions.
How much do I stand to save by refinancing?
Knowing how much you stand to save by going forward is important. This number varies depending on your loan’s interest rate, the term, and the equity in the house. You’ll want to shop around for different loan terms and use a refinance calculator to plug in various numbers to calculate an estimated savings amount.
Do I want to shorten the loan’s term?
This depends. You need to ask yourself whether this aspect is important to you. If you plan to move or sell sooner rather than later, and you can shorten your original loan term without raising the monthly payment significantly, it may be a good choice.
Do I want to convert from a fixed-rate to an ARM rate Loan?
Fixed-rate loans are steady. They are locked in for the duration of the loan, whereas ARM loans can vary. Markets fluctuate, which means your mortgage rate from 20 years ago is higher than the rates now. Alternatively, an ARM may be lower at certain times but is not a fixed number. Only you can answer the question of whether refinancing to go from one type of rate to the other is right for you.
Do I plan to stay long-term or sell?
You will also want to ask yourself whether you plan to stay in your home long-term or sell before the mortgage term is up. This affects your decision of whether to refinance. If you plan to sell in a year or two, refinancing may not make much sense as you won’t be under the terms of the mortgage once you sell the home. However, if you plan to stay for many years to come, refinancing may be a good option.
Do I need to access the equity in my home?
Accessing your home’s equity can be helpful in some financial situations. If this is your purpose for refinancing, you want to ask yourself whether you have other options or whether getting access to the equity is smart. If you access the equity to consolidate debt, you should adopt sound financial habits so that the equity isn’t wasted. One of the best reasons to refinance and tap into the equity is to do home repairs or remodels that add value to your home.
Are You Ready to Refinance Your Home?
If you have asked yourself these questions and want to move forward with the refinancing process, visit T&I Credit Union to view our home refinancing options. Call a loan specialist at (248)-397-9456 today to discuss refinancing options, rates and find out about the application process.